Carlyle picks up 20% stake in Piramal pharma biz for $490 mn

Carlyle has agreed to pick up a significant minority stake in Ajay Piramal’s pharma business for $490 million trumping rival private equity peers KKR and TA Associates.The 20% stake sale values Piramal’s pharma business at Rs 20,000 crore.

Carlyle has agreed to pick up a significant minority stake in Ajay Piramal’s pharma business for $490 million trumping rival private equity peers KKR and TA Associates.

The 20% stake sale values Piramal’s pharma business at Carlyle’s offer would value the business at around Rs 20,000 crore ($2.6 billion). The market capitalisation of the Piramal Enterprises is Rs 30,280.78 crore. The stock has appreciated 48% in last 1 month in anticipation of this transaction even as Piramal Enterprises posted a net loss in the March quarter. Inclusive of debt, the business is valued at $2.7billion with an upside component of up to US$360 million depending on the company’s FY21 performance, Piramal said in a statement on Saturday.

ET was the first to report on this impending deal on June 12th.

This will be the second pharma transaction for the US private equity group in as many months, having bought SeQuent Scientific, India’s largest pure-play animal healthcare company in May, underscoring its appetite to buy or partner with top flight pharma and healthcare companies in the country. It has in the past backed Medanta Medicity Hospital, a leading hospital chain and Metropolis Healthcare, which operates a chain of diagnostic centres and laboratories in India.

Globally, Carlyle has strong experience in the pharmaceutical services sector, having invested in Albany Molecular Research (AMRI), a global contract research, development and manufacturing organization (CDMO), PPD, a leading global contract research organization (CRO), and Ambio, a global pharmaceutical ingredient manufacturer.

“Given global pharma industry trends, we see attractive opportunities for organic as well as inorganic growth in each of these businesses,” said Neeraj Bharadwaj, Managing Director, Carlyle Asia Partners. “We will leverage our global network, extensive knowledge of the healthcare sector, and operating experience to seek to expand its platform, develop strategic opportunities and facilitate broader market access.”

Listed Piramal Enterprises Limited (PEL) is a diversified company with a presence in pharma, financial services and healthcare information management business. The promoters own 46.6 per cent in the company, as on March 2020. But the group’s financial services businesses have been under pressure, like most of its peers in the sector. In the last 1 year, the PEL shares have lost 51 per cent versus a 16% decline in the Sensex.

Piramal has been looking at unlocking value in the pharma vertical of flagship Piramal Enterprises by selling a stake to a financial partner ahead of a proposed demerger. It had appointed investment bank Rothschild for the divestment late last year. The plan is to subsidiarise the pharma business and eventually list it separately, in India or overseas.

“This is an affirmation of the strength of our ability to build new, attractive and scalable businesses with a significant runway for continued organic growth and opportunities for consolidation. This infusion of funds will further strengthen our balance sheet and provide us with a war chest for the next phase of our strategy,” said Ajay Piramal, chairman, Piramal Enterprises.

“This fresh growth investment into our pharma business will be used as growth capital for the pharma businesses to expand capacity across our sites as well as to tap attractive acquisition opportunities within and outside India. In the interim, the proceeds from this capital raise may also enable us to further strengthen our balance sheet through deleveraging in the near term,” added Nandini Piramal, executive director, Piramal Enterprises.

The Piramal Group’s balance sheet has been impacted by concerns of exposure to weakened corporate lenders and developers who borrowed from its nonbanking financial company (NBFC) arm.

PEL posted a loss of Rs 1,703 crore in the March quarter, after provisioning more than Rs 1,500 crore for potential coronavirus-related losses in its lending business, even as the company reduced its net debt by almost a quarter in the past year to Rs 37,283 crore.

Even after selling its domestic formulations business to Abbott for a record Rs 17,000 crore ($3.7 billion) in 2010, Piramals have built a near billion dollar business in pharma spanning continents and segments. But even then, it currently contributes only 41% of the group’s overall revenues, a sharp drop from 60% just two years ago. The real estate and financial services businesses have in turn become far more dominant in comparisons.

The group is present in the entire pharma value chain, from development and commercial manufacturing to off-patent supplies of active pharmaceutical ingredients (APIs) and formulations. In the critical-care segment, it has a portfolio of niche branded generic hospital products, and is also among the top global players in inhalation anaesthetic products.

The pharma vertical has been growing at 15% CAGR over the last 9 years to end fiscal 2020 with sales of Rs 5419 crore. With 26% margin, it clocked around Rs 1436 crore EBITDA in the same fiscal.

Within the pharma vertical, Piramal Pharma Solutions is a contract development and manufacturing organisation (CDMO) has emerged as the mainstay contributing 58% of revenues. Piramal Critical Care is a hospital generics company with a presence in 100 countries generating 34% of pharma division's topline, including the US and Europe. The Consumer Products Division, 5th largest in the country, deals in over-the-counter (OTC) drugs, skin care (Lacto Calamine), vitamins and nutrition, antacids like Polycrol, analgesics (Saridon), gastro-intestinal and baby-care (Little’s) . The phytomedicines business is involved in the development of healthcare solutions from natural sources and phytopharmaceuticals.

Over the last one year, the Piramal group has seen several divestments across its businesses as well as investments to strengthen its balance sheet. Piramal sold 10% in Shriram Transport Finance for Rs 2,300 crore that offered liquidity to the lending business as part of a “broader strategy” to leverage opportunities for growth in its financial services vertical. But its plans to exit Shriram Capital have not yet fructified.

Subsequently, Canadian pension fund CDPQ also deployed Rs 1750 crore ($300 million) through a preferential allotment as part of a larger fund raising initiative including a Rs 3650 crore rights issue. Earlier, in January, Piramal Enterprises also agreed to sell its health care data analytics business Decision Resources Group to the U.S.’s Clarivate Analytics for $950 million. The cash-and-stock deal closed in February, the company said.

“The pharma segment grew led by steady demand in complex products and healthy order-book in services. The segment includes complex products such as inhalation anaesthesia, injectable anaesthesia, pain-management products, and intrathecal spasticity products. The services segment benefits from ramp-up of recently expanded capacities in high-potent bulk drugs and anti-bodies,” Crisil observed in a ratings analysis of PEL in January but added, “The global pharma, OTC, and healthcare analytics businesses have been grown largely through acquisitions. While revenue has been ramped up, these acquisitions are yet to contribute materially to profitability.”

Cyril Amarchand Mangaldas and Covington & Burling LLP served as legal advisors to PEL on this transaction. J.P. Morgan served as financial advisor and AZB & Partners and White & Case served as legal advisors to Carlyle.